OUTLOOK 2006: Will trucking's luck hold?

The conditions that made over-the-road trucking both financially lucrative and operationally challenging through 2005 are forecast to hold sway again all this year. With the industry and the economy in general having for the most part dodged the twin arrows of Hurricanes Katrina and Rita, trucking's luck seems to be holding out. And that's allowing managers of over-the-road fleets to feel their businesses

DAVID CULLEN, EXECUTIVE EDITOR | Jan 01, 2006

The conditions that made over-the-road trucking both financially lucrative and operationally challenging through 2005 are forecast to hold sway again all this year. With the industry — and the economy in general — having for the most part dodged the twin arrows of Hurricanes Katrina and Rita, trucking's luck seems to be holding out.

And that's allowing managers of over-the-road fleets to feel their businesses can keep humming along, barring any new shocks to the nation's freight system or economy. Yet there is plenty to do managing old, familiar but still potent shocks — driver availability above all.

So rub that rabbit's foot or knock on the woodgrain or drive for the nearest patch of four-leaf clover. But then be sure to manage your rolling assets and your people just as hard and smart as ever.

GOOD GDP

According to the latest economic outlook issued by the Paris-based Organisation for Economic Cooperation and Development (OECD), the U.S. will see 3.5% GDP growth in 2006, which would be just a hair under the 3.6% growth rate it expects will be recorded for 2005.

The international agency says this performance was due to output that has grown at a solid pace “underpinned by robust productivity growth, buoyant house prices, and fiscal and monetary stimulus.”

OECD expects the U.S. “recovery will maintain a relatively smooth trajectory — despite damaging hurricanes [in 2005] and large increases in oil prices.”

Bob Costello, chief economist and vp of the American Trucking Assns. (ATA), concurs that in 2006 the economy will grow at a “slightly slower pace” than last year, with GDP for the whole year winding up in the “high 2's to 3%” range.

Costello is confident that “truck tonnage in 2006 will be in line with what we've experienced in 2005, say roughly at or slightly below '05 levels.”

With January and February expected to be “as always, tough months for trucking,” Costello says first-quarter revenues will be the weakest. He says to keep an eye on holiday-sales reports to get a fuller picture.

“If those sales wind up above retailers' expectations, the first quarter for trucking won't be down any more than [historically] expected,” Costello explains. “But if they're weaker, January and February results will be, too. We think [at press time] the holiday season will be decent, so expect a normal start to the year.”

Analyst Chris Brady, president of Commercial Motor Vehicle Consulting (CMVC), agrees that freight volume in '06 will be positive.

“Inventories are lean,” Brady remarks. “That implies consumer and business spending will pull freight through the entire supply chain, from production right through distribution. If holiday sales are better than originally anticipated,” he adds, “that will mean less stock [inventoried],” so freight volumes will rise more.

No matter which tea leaves you favor peering at, Brady says you'll conjure up a positive freight environment. “This year will look like '05, segment by segment,” he asserts. “But look for business freight to expand faster than consumer freight.”

According to ATA's Costello, key areas of the economy that will help power trucking through '06 include:

Business investment: “Sales of everything from computers to machinery will continue to be strong.”

Building materials: “Everything needed to rebuild will be heading into the Gulf region.”

Imported goods: “We're in a global economy and these shipments have to be moved.”

On the other hand, Costello expects — as so many economists do — that the housing market “will cool eventually.” He doesn't speak of a bubble breaking, but rather of the rate of housing growth slowing. He notes that while “manufacturing output will slow from '05, it will remain a bright spot for the U.S. economy” and hence truckers, too.

CMVC's Brady says higher driver pay and steeper fuel prices will dog carriers again this year, but profits will nonetheless remain healthy simply “because capacity limits have shifted the balance of power [on rates] from shippers to carriers.”

ATA's Costello is also certain for-hire revenues will “continue to be strong because capacity will continue to be very tight. Carriers can't easily add drivers and that is holding down capacity.”

While revenues may remain impressive, so too will operating costs, notes Costello, led of course by demands for higher driver pay and the rising cost of diesel fuel.

DRIVER ISSUE

Even if a carrier wants to expand capacity, the driver shortage will again make that hard to accomplish. Not helping matters are two key factors, one that is nothing new and one that is quite new and quite something.

“Fleets can't expect to grow rapidly by inking owner-operators at this time,” says CMVC's Brady. “With a good freight environment, more independents will be choosing to work under their own authority because it is more lucrative, rather than for someone else.”

And, says Brady, the massive rebuilding effort that's gearing up along Gulf Coast now is sure to siphon off drivers interested in working directly for FEMA or other agencies, or in taking well-paying construction jobs.

To get enough people behind their steering wheels, Brady says fleets will have little choice but to pay company drivers more and to do more to keep owner-operators happy, such as by passing fuel surcharge payments along to them as quickly as possible.

Concern about the cost of keeping drivers in the saddle and fuel in the tanks is borne out by remarks recently made by carrier executives during quarterly earnings teleconferences with stock analysts and journalists:

“We are currently meeting with our customers … explaining how [high fuel prices] negatively affects our earnings as well as the truckload industry as a whole,” said Clarence Werner, chairman, president and CEO of Werner Enterprises. “If the shipping and trucking industries do not work together to address this problem, [shippers] risk losing a substantial amount of truck capacity.”

“The driver market remains very challenging,” said Kirk Thompson, president & CEO of J. B. Hunt. “The supply of qualified drivers continues to be constrained due to alternative jobs to truck driving that are available in today's economy. Our company continues to focus on driver quality-of-life issues, such as developing more driving jobs with more frequent home time, providing drivers with newer trucks, and maximizing mileage productivity within HOS regulations.”

“In addition to expanding our revenues, we continued our focus on controlling costs,” said Kevin Knight, chairman and CEO, Knight Transportation. “Rapidly escalating fuel prices have been a significant challenge for our industry…. we are intensifying our efforts to improve deficient fuel surcharge arrangements to mitigate the negative impact on earnings due to increases and volatility in fuel prices.”

STRONG DEMAND

“Growth in capacity continues to be constrained by a tight supply of available drivers and independent contractors, as well as by high fuel costs,” said Patrick Quinn, co-chairman of U.S. Xpress Enterprises. “Strong demand in truckload has enabled us to improve pricing and yields. Consistent with others in our industry, we are also aggressively pursuing a more rational fuel surcharge program, which we expect to help mitigate the impact from high fuel prices.”

“We continue to face high oil prices and the tightening supply of qualified drivers,” said Robert M. Powell, chairman & CEO of USA Truck “We believe that we have programs in place to manage both of these challenges, but the programs are expensive and will require a great deal of management focus and discipline.”

Short of launching more creative strategies — such as recruiting minorities or building robot drivers — little can be done overnight to fix the driver shortage.

But thankfully, there is a more positive outlook on fuel. CMVC's Brady says that although fuel prices will likely remain at historically high levels, “the good news is we shouldn't see the volatility in fuel prices during '06 that we encountered in '05.”

Jim Feenstra, senior vp-marketing for Penske Truck Leasing, says the full-service lessor expects to enjoy strong growth in '06 as it did in '05.

“We anticipate growth on the leasing side industry-wide, as more private fleets move to full-service leasing due to concerns over dealing with higher operating costs and the uncertainty about '07 engines,” says Feenstra. “We also see growth in our dedicated operations from customers who want to alleviate their issues with finding drivers and keeping pace with growth and the necessary infrastructure to support it.”

According to Hal Booth, senior vp of First Fleet Corp., which provides asset management services to private fleets, 2006 will be a year for private trucking operations to really “think green.”

As he sees it, it's important for these fleets to distinguish themselves by “improving their position within their own corporate environment,” which may well entail reflecting or even raising the environmental profile of their parent firm.

“And if more of these truck buyers are thinking green,” Booth contends, “they'll have an extra incentive not to pre-buy trucks ahead of the 2007 engine emissions change. It'd be hard to promote an environmental commitment, internally or externally, if you were seen to be dodging the least-polluting trucks as they became available.”

PRE-BUY OR NOT

How green they are or not, many private carriers won't pre-buy simply because it's not in their nature. “These fleets won't pre-buy because they don't want to get [trade cycles tied to lease terms] out of whack,” says Booth.

“Buying 200 trucks in a year [beyond a usual cycle] would mean running some longer than they should and taking others out earlier than needed,” he explains.

“Budgeting is a reality in the big companies many private fleets are part of,” Booth continues. “There may be a 3% to 5% increase in a year, but there's not going to be a doubling” [of the budget].

Either way, Booth says First Fleet will certainly not be recommending pre-buying to its customers.

Still, he offers this caveat to fleets seeking production slots for even their regular order of trucks: place it with the OEM as soon as possible. “Those order boards will fill up,” states Booth.

When it comes to common carriers, CMVC's Brady figures most of them haven't yet decided whether they will pre-buy trucks in '06 to delay dealing with the new more costly engines that will be unavoidable beginning in 2007.

“You can be sure there will be a pre-buy,” Brady says. “The surge in orders that signaled the last pre-buy came between the end of February through May — by then there were enough orders to fill the boards at OEMs.”

As for guesstimating pre-buying, Brady points out motor carriers “historically are not long-term planners. Instead, they are very operationally focused because they have to have their eyes on today's freight to make money.”

First Fleet's Booth figures '06 order boards will fill up from the fourth quarter back. Brady concurs, noting that many fleets will want to take in their '06 deliveries “as late as possible so they can run pre-'07 engines as long as possible.”

Still, Brady doesn't expect this pre-buy to be monumental. He thinks it will be in the range of 20,000 to 25,000 units.

While it may still be too early to call the pre-buy, another issue clearly looms large — as ever.

“Drivers remain the industry's largest issue,” says Penske's Feenstra. “There must be a more robust pipeline to bring them into the business and greater efforts to make driving a truck an appealing career.”

“Except for the '07 uncertainty,” Brady adds, “'06 will be a lot like '05, right down to drivers remaining the biggest obstacle to fleets expanding.”

Sounds like last year all over again, alright.

Sticking with it

Lucky year or not, Contract Freighters Inc. (CFI) is sticking with its smarts to ensure success in '06.

As for '05, the truckload carrier's president & CEO, Herb Schmidt, reports it was the “busiest year ever — we had to turn down more loads, proportionally speaking, than in the 21 years since I've been here. We could have kept 500 to 700 more trucks busy, and that was not anticipated.”

Yet had that many trucks — not to mention the drivers for them — been available, CFI wouldn't have grown anywhere near that much.

“The driver situation makes that hard anyway,” he continues. “And while you usually lose drivers to construction jobs every spring, the Katrina recovery started drawing them off in the fall — and still is.”

Schmidt says CFI will continue to stress the fundamentals to combat the driver shortage. “Dollar for dollar,” he remarks, “the more you advertise and spread that base further over geographical areas [the more drivers will be netted]. And you must be in the top 25 for pay to get your share of the caliber of drivers you want behind the wheel.”

Along with another perennial, fuel costs, Schmidt says the other bugaboos for '06 are whether to pre-buy or not to pre-buy to avoid trucks with '07 engines and how best to deal with the revised hours-of-service (HOS) rule.

“We do plan some modest gains in net equipment count per our controlled growth strategy,” says Schmidt, “but our jury is still out on whether to adjust our trade cycle in the face of '07.”

Schmidt is more certain about the new HOS rule. “It has thrown us a curve,” he states. “It is less flexible and doesn't reflect the reality of human behavior.

“Where before a driver could catnap in a sleeper, now if they enter they have to stay in there for eight hours — unless it comes off driving time,” he continues. “That means drivers will be more likely to ‘push through’ patches of sleepiness. And common sense tells you that will only lead to a higher accident frequency.” — DC